Force out limits

I have been asked by a prospective client how the $5,000 force out limit applies to a terminated participant who will receive an additional allocation that will bring the balance over $5,000. For example, assume the participant terminates employment July 9 with a balance of $4,750. But the plan makes a profit sharing contribution after the end of the plan year. The participant will receive an additional $600 at that point, which would bring the account balance to $5,350 (assuming no change in the investment balances).

Knowing that many record keepers automate this process and would process the distribution before the end of the year with no way to anticipate a contribution receivable, I'm curious what the potential liability to the plan sponsor might be, if any. Does the answer change if the termination or distribution occurs after the end of the plan year? Or if it is a required contribution, such as a safe harbor other fixed contribution?

Our approach is to take the balance as of the date of the force-out - UNLESS there is an identified (and payable) receivable. in which case we wait. I don't see a future profit sharing contribution not yet payable to be an issue.  It will, of course, cause there to be a need for a secondary distribution.

Is the second distribution eligible for force out?

When I first started in the industry over 20 years ago (when the forceout was $3,500), I remember studying the rule (at the time) where if the balance exceeded the limit at any time, then you were precluded from forceout.  At time time (possibly around EGTRRA) it changed to say 'once your balance is below the limit, then you may forceout). 
With that understanding, I'm with MoJo that you may forceout since the balance is below $5,000 and then forceout again after the contribution is made. 

Instead of looking at it as a duplication of effort, I look at it as continuing with the already established notification and distribution procedures; and if the timing is right a participant could end up getting two separate notices at forceouts which may be months (or even a year) apart.

Good Luck!

As Mike has efficiently stated, the answer to this question is probably in the plan document.

On 6/30/2017 at 10:43 PM, ETA Consulting LLC said:

When I first started in the industry over 20 years ago (when the forceout was $3,500), I remember studying the rule (at the time) where if the balance exceeded the limit at any time, then you were precluded from forceout.  At time time (possibly around EGTRRA) it changed to say 'once your balance is below the limit, then you may forceout). 
With that understanding, I'm with MoJo that you may forceout since the balance is below $5,000 and then forceout again after the contribution is made. 
 

That is what I remember learning as well. Back then we were dealing with primarily balance forward plans, so there wasn't really a question about whether or not the receivable was included in the account balance.

Since I think the amount isn't part of the account balance until it's actually "allocated", you should be able to fall back on the plan's definition of the allocation date.

A $600 profit sharing contribution sounds much more discretionary than, say, a safe harbor contribution for the year, where you know that 3% is really due - but if the plan says it's allocated 12/31, then I'd think you could still get away with forcing out the first $4,700 first, before the amount is "officially" part of the account balance.

I agree with Bri as well.  I think the entire rule change eliminated the need to account for anything else other that the balance at the time.  If you have a balance of $5,000 and terminate employment as of February first and are entitled to a Safe Harbor Nonelective contribution of $100 at year end, does that right to a contribution now mean your accrued benefit is $5,100?  This is a rhetorical question but point out the potentially endless number of scenarios you can enter when you attempt to use anything other than the balance as of the date.  It would then require and different procedure other than a simple analysis of the balance on the date of distribution. 

I think the elimination of the rule in place years ago opened the door for you to simply administer the provision in the most simplistic method without having to perform the additional analysis of determining what the balance 'used to be' or 'will be'. The language in the plans that I've seen seems to be pretty consistent with this.  I've yet to see language that suggest adjustments to the balance on the date.

Good Luck!

I have a question related to this topic. If the AA says that the mandatory distribution will occur in the next plan year quarter following severance from employment, does that mean that the Plan only has a three month window to process the mandatory distribution?

For example, if the participant terminates 6/15/17, does the Plan only have from 7/1/17-9/30/17 to process the mandatory distribution after providing them with the necessary notice(s)? What happens if it isn't processed by 9/30, can it be processed at a later date?

Well, technically, it is an operational violation. You HAVE to process it at a later date - as soon as possible when error is discovered. But I have a hard time seeing where the real problem is, unless this is a recurring theme - the only correction is to process it, there's no lost interest, since presumably the account continues to earn interest. I suppose, if the assets LOST money, that there might be a make-up required since the distribution wasn't made timely under the terms of the plan. And as with any self-correction, documentation in the files as to how this will be prevented from happening in the future.

I agree with Belgarath.  I would actually find it odd that the plan is drafted in a manner to actually tie your hands to a specific time frame.  Generally, these types of provisions are written to provide for the maximum flexibility.  Let's suppose you terminate on July 1st... Such provision would now tie your hands into processing the involuntary cashout between October 1st and December 31st.  However, if you terminate a day earlier (e.g. June 30th), the written provision would 'require' you to process it within the next 3 months. 
Again, I agree with Begarath that "technically".....
From what I've seen in the documents that I work with, this provision provides for a little more flexibility (even fairly silent) on the timing.
On another note, I tend to use it like a weapon when trying to prevent a small plan from reaching 121 participants.  I even recommend clients to adopt an auto rollover for balances $5K or less when trying to keep the plan in small plan filer status.  At the end of the day, it's a good idea to stay atop of this provision.

Good Luck!

I suspected that it would be an operational error at the very least. 

Thank you both for your input!